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Trading In a Financed Car: How it Works

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Life situations change all the time; from a new family member to a new hobby, the kind of vehicle you financed three years ago may not work now. Don’t worry, because dealerships are often willing to accept a trade-in that isn’t completely paid off. Here’s how it works.

Trading In a Car to a Dealer

Trading In a Financed Vehicle: How it WorksWhen you take your vehicle to a dealership, the dealer is the one that determines your trade-in’s value. They’re going to look it over, and probably start it up and take it for a drive.

After your car is looked at and appraised, you’re given an offer. Since you’re still financing your trade-in, you need enough to be able to pay off your current loan. Hopefully, you get a large enough offer that can cover the balance. If not, you must pay the rest yourself in order to sell the vehicle.

If you’re offered more than your loan’s payoff amount, the leftover cash can be used to put toward your next car’s selling price, and lower the amount you need to finance moving forward.

If you do get an offer that can cover your loan balance, the dealership writes a check that gets sent to your auto lender to pay off the loan. The lender can then remove the lien on the trade-in’s title, and the vehicle can be sold to the dealer. Remember: a financed car can’t be traded in or sold until the lien is removed from its title.

Checking for Equity on a Financed Vehicle

Having lots of equity is beneficial when you need to trade in your financed vehicle. Equity is when you owe less on the car than its cash value, and the equity is what you can use to knock down your next vehicle’s selling price. If you owe more on your car than it’s worth, it could mean trouble. We cover both sides of the equity coin.

But first, before you head to the dealership, you should get a rough idea of what the estimated value of your vehicle is so you can tell what equity position you’re in.

Remember, the actual cash value of your car is whatever a dealer offers you for it, and it may not match what you see on online valuation sites. You should also get a hold of your lender or use online services to check your current loan balance.

Luckily, it’s relatively easy enough to get an estimate on your vehicle’s trade-in value nowadays. You can use sites like NADAguides or Kelley Blue Book and enter in your car’s information and get a ballpark valuation. Compare those estimations to your financed vehicle’s loan balance.

If you owe less on the car than it’s likely to be valued at, then you’re most likely in an equity position – great! If you owe more than the vehicle’s estimated value, you’re in a negative equity position – not so great.

If your car has negative equity, the trade-in value you’re likely to get can’t help you knock down your next vehicle’s selling price, and you may not even get enough from the dealership to pay off your current loan to be able to sell the car.

If you’ve found yourself in a negative equity position, also called being upside down on your loan, how much negative equity you have is going to determine your next step. If you don’t owe much more than your loan balance, you could simply pay that difference in cash to pay off the loan and remove the lien. Or, you could give yourself a few months and work to pay down your loan to get yourself in an equity position, and then trade the financed vehicle in.

Getting the Most Out of Your Trade-In

Once you have an estimated value and your loan balance, you can walk confidently into a dealership. However, we’ve got some tips on getting the most out of your trade-in:

  • Discuss your next car’s price first. Before you reveal that you have a trade-in, work on coming to an agreement on your next vehicle’s selling price. You should treat the trade-in and your next car’s transactions separately. Once you have the vehicle’s selling price down on a buyer’s order, reveal the trade-in, and discuss that transaction separately.
  • Clean your trade-in. A dirty car may not give the best impression while it’s being appraised. Don’t clean out all your personal possessions, though, since a perfectly clean trade-in may give the impression that you’re ready to buy now, and you may lose some bargaining power, since the dealer may notice that you’re in a rush.
  • Don’t worry too much about big repairs. The dealership can usually fix large repairs for less than you can. If you spend too much on expensive repairs, you could end up putting more into the vehicle than you might be offered. Minor scratches and cabin stains are likely to be worth cleaning up, though.
  • Call around. You don’t have to settle for the first trade-in offer you get. Take time to call around to a few dealers before you drive anywhere, so you can see what your car is going for in your area. This can also give you some bargaining power.

Planning ahead is a good way to approach trading in a financed vehicle. A little bit of research, sprucing up your car, and calling around to different dealerships can really go a long way.

If you don’t like the offers you’re getting from dealers, you can always try to sell your vehicle yourself. You may be able to get more for it, but it does require more legwork on your end.

Bad Credit and Trade-Ins

Trade-ins, financed or not, are very common and usually helpful for bad credit borrowers. If you’re a borrower with less than perfect credit, you’re probably going to need a down payment to get into your next auto loan.

However, the down payment amount doesn’t need to be paid in just cash. A trade-in with equity can allow you to cover the down payment requirement of bad credit car lenders.

Typically, a bad credit lender requires a down payment of at least $1,000 or 10% of the vehicle’s selling price (sometimes whichever is less). The selling price of your next car, your income, and your personal situation are all going to determine how much of a down payment you’re going to need to bring to the table.

Besides helping bad credit borrowers get into an auto loan, trade-ins lower your monthly payment, since they knock down the amount you’d need to finance on your next vehicle. Since you’re lowering the amount you need to finance, you’re also saving some cash on interest charges, which can stack up if you have less than perfect credit.

Down payments and trade-ins are great resources for borrowers, and dealerships are used to buyers having both. Whatever dealer you choose to work with, they’re likely well versed in handling trade-ins, even ones that are still being financed.

Finding a Bad Credit Car Dealership

While it isn’t usually that difficult to find a dealership that can take in your financed trade-in, finding a lender that can work with your bad credit is a different story. Most traditional car lenders turn down borrowers with lower credit scores, but there are lenders equipped to deal with many different credit situations.

If you need a dealer with bad credit lending resources, get with us at Auto Credit Express. We have a network of dealerships that expands coast to coast, and we match bad credit borrowers to them for no cost. To get started, fill out our secure auto loan request form.

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How to Avoid a Prepayment Penalty When Paying Off a Loan | Pennyhoarder

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Look at you, so responsible. You received a financial windfall — stimulus check, tax refund, work bonus, inheritance, whatever — and you’re using it to pay off one of your debts years ahead of schedule.

Good for you! Except… make sure you don’t get charged a prepayment penalty.

Now wait just a minute, you say. I’m paying the money back early — early! — and my lender thanks me by charging me a fee?

Well, in some cases, yes.

A prepayment penalty is a fee lenders use to recoup the money they’ll lose when you’re no longer paying interest on the loan. That interest is how they make their money.

But you can avoid the trap — or at least a big payout if you’ve already signed the loan contract. We’ll explain.

What Is a Loan Prepayment Penalty?

A prepayment penalty is a fee lenders charge if you pay off all or part of your loan early.

Typically, a prepayment penalty only applies if you pay off the entire balance – for example, because you sold your car or are refinancing your mortgage – within a specific timeframe (usually within three years of when you accepted the loan).

In some cases, a prepayment penalty could apply if you pay off a large amount of your loan all at once.

Prepayment penalties do not normally apply if you pay extra principal in small chunks at a time, but it’s always a good idea to double check with the lender and your loan agreement.

What Loans Have Prepayment Penalties?

Most loans do not include a prepayment penalty. They are typically applied to larger loans, like mortgages and sometimes auto loans — although personal loans can also include this sneaky fee.

Credit unions and banks are your best options for avoiding loans that include prepayment penalties, according to Charles Gallagher, a consumer law attorney in St. Petersburg, Florida.

Unfortunately, if you have bad credit and can’t get a loan from traditional lenders, private loan alternatives are the most likely to include the prepayment penalty.

Pro Tip

If your loan includes a prepayment penalty, the contract should state the time period when it may be imposed, the maximum penalty and the lender’s contact information.

”The more opportunistic and less fair lenders would be the ones who would probably be assessing [prepayment penalties] as part of their loan terms,” he said, “I wouldn’t say loan sharking… but you have to search down the list for a less preferable lender.”

Prepayment Penalties for Mortgages

Although you’ll find prepayment penalties in auto and personal loans, a more common place to find them is in home loans. Why? Because a lender who agrees to a 30-year mortgage term is banking on earning years worth of interest to make money off the amount it’s loaning you.

That prepayment penalty can apply if you want to pay off your loan early, sell your house or even refinance, depending on the terms of your mortgage.

However, if there is a prepayment penalty in the contract for a more recent mortgage, there are rules about how long it can be in effect and how much you can owe.

The Consumer Financial Protection Bureau ruled that for mortgages made after Jan. 10, 2014, the maximum prepayment penalty a lender can charge is 2% of the loan balance. And prepayment penalties are only allowed in mortgages if all of the following are true:

  1. The loan has a fixed interest rate.
  2. The loan is considered a “qualified mortgage” (meaning it can’t have features like negative amortization or interest-only payments).
  3. The loan’s annual percentage rate can’t be higher than the Average Prime Offer Rate (also known as a higher-priced mortgage).

So suppose you bought a house last year and then wanted to sell your home. If your mortgage meets all of the above criteria and has a prepayment penalty clause in the mortgage contract, you could end up paying a penalty of 2% on the remaining balance — for a loan you still owe $200,000 on, that comes out to an extra $4,000.

Prepayment penalties apply for only the first few years of a mortgage — the CFPB’s rule allows for a maximum of three years. But again, check your mortgage agreement for your exact terms.

The prepayment penalty won’t apply to FHA, VA or USDA loans but can apply to conventional mortgages — although the penalty is much less common than it was before the CFPB’s ruling.

“It’s more of private loans — loans for people who’ve maybe had some struggles and can’t qualify for a Fannie or Freddie loan,” Gallagher said. “That block of lending is the one going to be most hit by this.”

How to Find Out If a Loan Will Have a Prepayment Penalty

The best way to avoid a prepayment penalty is to read your contract — or better yet, have a professional (like an attorney or CPA) who understands the terminology, review it.

“You should read the entirety of the loan, as painful as that sounds, because lenders may try to hide it,” Gallagher said. “Generally, it would be under repayment terms or the language that deals with the payoff of the loan or selling your house.”

Gallagher rattled off a list of alternative terms a lender could use in the contract, including:

  • Sale before a certain timeframe.
  • Refinance before a term.
  • Prepayment prior to maturity.

“They avoid using the word ‘penalty,’ obviously, because that would give a reader of the note, mortgage or the loan some alarm,” he said.

If you’re negotiating the terms — as say, with an auto loan — don’t let a salesperson try to pressure you into signing a contract without agreeing to a simple interest contract with no prepayment penalty. Better yet, start by applying for a pre-approved auto loan so you can get a pro to review any contracts before you sign.

Pro Tip

Do you have less-than-sterling credit? Watch out for pre-computed loans, in which interest is front-loaded, ensuring the lender collects more in interest no matter how quickly you pay off the loan.

If your lender presents you with a contract that includes a prepayment penalty, request a loan that does not include a prepayment penalty. The new contract may have other terms that make that loan less advantageous (like a higher interest rate), but you’ll at least be able to compare your options.

How Can You Find Out if Your Current Loan Has a Prepayment Penalty?

If a loan has a prepayment penalty, the servicer must include information about the penalty on either your monthly statement or in your loan coupon book (the slips of paper you send with your payment every month).

You can also ask your lender about the terms regarding your penalty by calling the number on your monthly billing statement or read the documents you signed when you closed the loan — look for the same terms mentioned above.

What to Do if You’re Stuck in a Loan With Prepayment Penalty

If you do discover that your loan includes a prepayment penalty, you still have some options.

First, check your contract.

If you’ll incur a fee for paying off your loan early within the first few years, consider holding onto the money until the penalty period expires.

Pro Tip

If you don’t have a loan with a prepayment penalty, contact your lender before sending additional money to ensure your payment is going toward principal — not interest or fees.

Additionally, although you may get socked with a penalty for paying off the loan balance early, it’s likely you can still make extra payments toward the balance. Review your contract or ask your lender what amount will trigger the penalty, Gallagher said.

If you’re paying off multiple types of debt, consider paying off the accounts that do not trigger prepayment penalties — credit cards and federal student loans don’t charge prepayment penalties.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.

This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.

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10 things you didn’t know will help you get a mortgage

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Anyone who wants to apply for a mortgage right now will know that it’s not easy. Coronavirus has made the process of applying longer, while lenders are now more careful than ever about who they will lend to. You probably already know that having a healthy credit score is essential to a successful mortgage application, but how can it be achieved? Personal finance experts from Ocean Finance  weigh in with the top tips for making sure your application is a success – that you may not have heard about. 

1. Make sure your name is on all household bills

If you share a rental, it can be tempting to let someone else put their name down on the utility bills and just pay them back. If you want a mortgage, avoid doing this: bills with your name and address on them are proof that you pay them on time. This especially applies to the rent itself – never move into a house share without your name being on the contract. Before applying for a mortgage, ask your landlord for a letter confirming that you pay on time. 

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How Can I Prequalify for a Personal Loan? A Guide

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When you are in need of money quickly, you very likely don’t want to sit around pondering a bunch of different options. You want to find the option that works best for you and utilise it. Unfortunately for so many people around the country, it can be difficult to get their hands on the money they need due to them having a bad credit score, or even no credit score at all.

How Can I Prequalify for a Personal Loan?

Photo, Varun Gaba.

Your credit score is thought of as being pretty important, as it shows your financial trustworthiness to financial institutions like banks, credit card companies, lenders, and more. Your credit score is one thing that will usually be considered by just about any company you apply for a loan through, so keeping a close eye on your credit score is imperative for your financial life.

No matter what your credit score looks like, knowing how you can prequalify for a personal loan can be a comforting feeling when you are in need of quick cash. After all, when you are eligible for personal loan prequalification, you feel a little better going into the loan process knowing you won’t have to wait around for a loan decision.

How is Pre-qualification Decided? Prequalifying for a personal loan can depend on several different factors that you will have to keep in mind, and it will vary greatly depending on the lender you are applying through. Here are two of the things you will need to keep in mind when it comes to your loan that could affect whether or not you prequalify for the loan.

— Your credit score; Yes, this is always going to be something you are going to need to think about. Depending on the financial institution or lender you are going through, you can bet that your credit history and score will play a huge part in whether or not you prequalify.

— The amount of your loan; How much money you plan on borrowing from the lender or bank is also going to play a part in deciding whether or not you prequalify.

To get the most out of your search for a lender that you could prequalify with, think about applying with more than just one lender. This way, you might get several pre-qualification offers, and this will allow you to sort through the lenders and decide which one works best for you.

How Can I Prequalify for a Personal Loan?

Photo, Christina @ wocintechchat.com.

The Pre-qualification Process: No matter where you are trying to prequalify for your loan through, you will find the process to be pretty simple and largely similar across most lending platforms. You will need to provide some information to the lender that will help them decide whether or not to prequalify you.

How Can I Prequalify for a Personal Loan?

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Some of the information you will need to provide includes:

— Your full name; You will want to make sure you provide your full legal name so you can make the process simple for yourself and the lender. Depending on the lender, you might also be asked to provide images of your government issued ID or driver’s license to validate your identity.

— Your income and information on your job; Your income and employment status are often considered over your credit score when it comes to pre-qualification for loans, especially if you are applying for a personal loan through a lender who deals with customers with bad credit or no credit.

— The loan amount you want; Of course, you will have to include the amount of money you would like to borrow. Make sure it is something reasonable, and something that you can realistically pay back on time.

What Will the Lender Do? If you are trying to prequalify through a lender who specialises in bad credit clients, then you won’t have to worry about your credit score being negatively affected by taking out your loan. However, if the lender reports to the credit bureaus, your payments could still make an impact on your credit score.

If not working with a specialised lender, you might find that the lender will do a soft inquiry on your credit when going through the pre-qualification process. No worries here, as this doesn’t put any dents in your score. If you prequalify for the loan you are looking for, you should get an alert via email from the lender of your choice.

The Money You Need: Hopefully, you will have prequalified for the loan you are looking for so you can ensure you have access to the money you need, when you need it. Whether you’re going through some unexpected circumstance in life or just need money to pay something off quickly, knowing you are prequalified for the loan you need is a comforting feeling, allowing you access to the cash you need for whatever you need it for.



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